26/04/2012 - Sweden should establish an independent committee of experts to oversee its National Pension Funds and set a clear, measurable financial objective for investments to ensure their long-term viability, according to a new OECD report.

The National Pension Funds are responsible for 12% of Sweden’s state pension liabilities, and manage assets of around SEK 895 billion. Over the next thirty years, payments are likely to significantly exceed contributions, and by 2040 the size of the funds (AP1 to 4 and 6) is expected to have fallen to SEK 400 billion.

The investment mandate is to provide as high a return on investment as possible, while minimising risk. Each fund is free to set its own strategy and objective. The OECD says it would be more effective for all to have a single, clear target, so performance could be better measured. Parliament should be asked to approve this new mandate and take into account the impact of demographic changes on payouts.

Sweden should also:

Establish an independent committee to oversee the funds, under Parliamentary oversight. It should set the objectives and measurement criteria, as well as nominate board members and promote public awareness of the funds’ role within the Swedish pension system.

Implement the Prudent Person Rule. This allows for the professional investment of assets, whilst controls should take the form of stronger governance and oversight of the funds’ performance, rather than establishing new restrictions on investments. Such restrictions could lead to suboptimal portfolios, an over-exposure to certain types of assets and reduce the benefits of having separate funds, says the report.

Strengthen the selection process for Governing Boards. A more transparent selection process for board members, open to non-Swedish nationals, is recommended.

Sweden’s National Pension Fund Inquiry commissioned the OECD report, which aims to contribute to the debate by comparing Sweden’s system with those of other countries and OECD guidelines.